Predicting the Global Economic Crisis

Predicting Global Economic Volatility

Commentary: While attention is focused on US domestic economic conditions, markets and investors are obsessively focused on the upcoming public speeches by President Obama and Fed Chairman, Ben Bernanke, this coming thursday, September 8, in the hope either, or both, will deliver a magic policy bullet to reverse somehow the trajectory of the US economy toward double dip recession. Meanwhile, the global economy itself continues to unravel and drift toward worldwide economic contraction. What will the effects of each–recent US and global economic developments–have on the other? What will both mean for US stock market and economic volatility this coming friday and the weeks to come? This writer has consistently argued that economists should predict the future, not the present–as most contemporary economists are content to do. So here’s my ‘going out on a limb’ and offering some predictions about the future, in the context of predictions made in the past about the inevitability of a financial crisis in Europe and the global economy.

This coming week, September 6-10, may prove one of the most volatile economically and financially since the global banking panic of September 2008both in the US and worldwide.

At the end of last week, stock markets in the US and around the world staggered on the news of the US August jobs report. That report showed zero jobs created last month, according to one of the Labor Departments jobs survey. The same Labor Departments second job survey–the one that didn’t gain much attention in the press–was even worse. It showed more than 212,500 jobs lost. Stocks plummeted.

What was overlooked with the big stock market drop-off at the close of last week was a growing instability in the bond markets, both government and corporate, that has also been emerging. Bond markets are far more important economically than stock markets. They dwarf the size of all world stock markets combined by several magnitudes of trillions of dollars.

Not just government bonds but corporate bonds as well. And not just bond markets in the US but in Europe, where it appears that the most recent bail out of Greece once again is about to collapse, just a few weeks after it was announced. This is the third Greek bailout. Or is it the fourth? Depends on your definition. However defined, the Greek default crises are now coming faster and more furious. There is no way the Eurozone can save Greece now from default and they are just beginning to realize that fact. The key question is, as the French say, ‘apres le deluge, quoi’ (after the fall what/who?)

The bankers and their politicians in Europe, UK and the USA would no doubt prefer to allow Greece simply to leave the Eurozone. But they cant. They are uncertain of its impact on the Euro currency, which would likely collapse below parity with the US dollar. That would wipe out trillions of Euro-denominated securities overnight, a terrifying thought for bondholders and other Euro and global investors. So they stumble along with bailout to bailout for Greece. And the bond markets begin to quiver.

Then there’s Italy and maybe Spain, and maybe even thereafter Belgium and France. If either of the four candidates enter a sovereign-bank crisis, then almost certainly another Lehman-event reminiscent of the crash of the Lehman Brothers investment bank back in 2008 will likely occur.

This was all foreseen by this writer back in late 2009, when the book, Epic Recession: Prelude to Global Depression (Pluto Press and Palgrave May 2010) was completed by this writer. To quote some of my predictions of two years ago:

“The Obama 2009 recovery program will, at best, result in a drawn-out economic stagnation, a period of weak and short recoveries followed by short and shallow declines; i.e. a W shaped or double dip recovery scenario. Or, at worst, will result in an eventual further collapse of the economy following a renewed financial crisis event.” (Epic Recession: Prelude to Global Depression, p. 314)

Or, the following prediction in January 2010 of a second banking crisis sometime 2011-14:

“The Euro financial system will be shaken in 2010 by one or more defaults on its periphery…The possibility of a second banking crisis and panic in 2011-14 is high.” (Z magazine, January 1, 2010).

A year later, in 2011, this same theme was taken up once again, where this writer predicted further:

“The Eurozone sovereign debt crisis will spread beyond the current four economies (Ireland, Portugal, Spain, Greece) and engulf Italy, Belgium, and potentially (though less likely France)…A restructuring of the EU currency system will result in a kind of two-tier euro currency.” (Z Magazine, January 1, 2011)

And then this past spring,

“The US and other major global economies are once again on the cusp of a significant slowdown. “(Truthout Blog, June 5, 2011)

And two weeks ago,

“The big economic engines of Europe (France, Germany, UK) are all about to tip into recession themselves in the coming quarter. ..If Italy, or even Spain, are among the two (Euro sovereign defaults), it is almost certain one or more French or Swiss Banks will become the next Lehman.” (Znet blog, August 29, 2011)

The coming week of September 5-10 may prove to be the most economically volatile in some time. In the Eurozone, unions are finally stirring in Italy. The reason: Prime Minister Berlusconi’s austerity package was abruptly changed after promises made to labor to include austerity for all, including the wealthy. Their taxes were to be raised. Then he reneged. No tax increases for the rich, but austerity for workers and the rest. Understandably the Italian workers felt betrayed. Promises of sharing of equal sacrifices were shown to be a sham. Berlusconi was no doubt told by his rich supporters he had to change the terms over the weekend.

This backtracking by Berlusconi reveals the central fundamental issue in all the austerity programs being launched across the globe–in the US (called deficit cutting here) and Europe. These programs are fundamentally about two things:

First, imposing austerity is so that bondholders and their banks don’t have to take any losses. Make the people pay for the bailouts of those same banks and investors who, by the way, caused the crisis in the first place. Banks and bondholders refuse to take any losses.

Second, austerity means cutting social programs, wages, benefits only–without any tax hikes. In other words, once again, make everyone else pay but dont touch the tax cuts of the rich. That was clear in Berlusconi’s reversal over the weekend. Its also abundantly obvious in US Republican and Teaparty politicians refusal to accept any form of tax hike for the rich and corporations. Austerity is for the bottom 95% households; not for the top 5%.

So watch Italy this week, the Italian unions, and the rest of the Eurozone bondholders and banks. Watch Greece. Watch what happens in the capitols of Paris, Berlin, and London in response to coming events this week. As that crisis deepens in Europe this week and next, the financial instability will deepen further in Europe. It will have repercussions for US stock and bond markets, without a doubt. Stock market swings of 300-500 points a day will occur in response, in part, to the Eurozone crisis.

The Eurozone crisis comes at an inopportune time, as instability in the US also ratchets up this week for domestic reasons. All ears are on what Obama will announce on Thursday, September 8. But dont hold your breathe. It will prove under-whelming. And the markets will react accordingly.

The President will rummage into his policy bag of two years ago, dust off what he didn’t offer then, and announce it later this week–just about when the crisis in Europe intensifies. What were likely to see are: an infrastructure bank financed by private interests, more tax cuts for business, more deregulation of business, more payroll tax cuts, call to conclude new free trade agreements. In short, the stuff his corporate advisers have been recommending to him.

How the stock and bond markets will react this week to the deepening Euro crisis and to the Obama jobs proposals will prove interesting. How bank stocks respond will be especially interesting. Already Bank of America and Citigroup, two of the biggest, are experiencing a freefall in their stock price. Both banks have been technically insolvent for the past two years. The upheaval in Europe and US domestic events may push their stock prices down further, to low single digit levels. That collapse in their capitalization means eventually the need for more bailouts.

If stocks tank at this coming Friday after Obama’s jobs announcement, or earlier due to the Euro-Italy-Greece crisis, all eyes will then turn to the Federal Reserve once again in the mistaken hope it can prevent the economy from sinking further. Investors will expect another Quantitative Easing (QE) program. But this time they may not get the money injection they expect. The Fed has an internal revolt of its own now underway. At best it may provide a QE 2.5, which will boost stocks a little for a short while. But that will soon fade as well, as the stock markets realize there is no further injection of hundreds of billions of dollars coming from the Fed this time around. The last short-lived stock boomlet of earlier this year was driven largely by the Feds preceding QE2, initiated last October 2010 and concluded this past June 2011. It pumped up stocks and commodities speculation in oil, metals, cotton, food grains, which has translated into rising gasoline and food prices for the general consumer and falling real wages in turn. But QE2 did nothing for housing or jobs recovery. The same results can be expected from any new version of QE 2.5 as well.

Capitalist policymakers from Washington to Berlin to Paris to Rome are fast running out of policy bullets to contain a crisis that is once again beginning to show early signs of spinning out of control. The bullets to date have aimed only at social programs, wages, benefits, and John Q. Taxpayer. None have been intended for bondholders, investors, bankers, or big multinational corporations. All austerity programs to day everywhere–US, Europe, etc., have targeted everyone but the bond holdings of the rich, their tax rates, loopholes, and tax havens, or their record accumulated cash on hand. That may soon prove impossible to continue.

How soon their privileged exclusion from paying for the crisis depends on how much those targeted–workers, consumers, unions–resist and how hard they push back. Perhaps what happens in Italy and Italian unions this coming week will be an early sign.

There are only three ways to resolve the global financial crisis with its mountain of bank, corporate, and government debt. One is to grow out of the crisis. But economic growth is not on the horizon. In fact, quite the opposite. The second is to squeeze the taxpayer, the worker, the consumer, the retiree and make them pay. But that just may radicalize folks and push them out of the electoral orbit of the dominant political parties and into the arms of the new parties that challenge their old control. The third is to make the bond and debt holders take their losses, expunge their debt, pay them the pennies on the dollar their bad assets are worth, or none at all, and move on. The latter, third option is the quickest and most certain. But investors, wealthy, bondholders, and corporations will fight to the finish to prevent it.

Its all about who pays. Austerity solutions mean the rich get to keep their tax cuts and the rest have to pay the bill for their excesses that caused the crisis. Austerity never resolved a financial or economic crisis, however. It only makes it worse. Just look at Greece today. Italy and Eurozone tomorrow. And USA thereafter.

In the meantime, get ready for an economic volatility roller-coaster this coming week and the weeks and months immediately ahead.

Jack Rasmus
September 5, 2011

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On page 220 of Epic Recession you list the Fed. Reserve Flow of Funds report showing increases of debt, 1978 – 2008, from four sectors, government debt up 8.0 times, Consumer debt up 10.3 times, non-financial corporations up 9.4 times, and financial corporations up 47 times. Financial corp. debt from 1998 – 2008 rose from $6.3 trillion to $19.5 trillion, tripling in ten years. The book The Great Financial Crisis by Foster and Magdoff shows a chart, page 121, that financial firm debt rose from 10% of GDP in 1970, to 22% in 1980, to 45% in 1990, to 83% in 2000, to 123% in 2007. During 1998 to 2008 the inflation adjusted GDP rose 28% or so, while the financial corporation debt burden tripled, and inflation adjusted maybe doubled. Financial sector debt very much out-shot economic growth, over-extended. And, financial corporation profits also tripled, but I don’t have figures, there’s a graph in Foster and Magdoff. Banks in the U.S. received $3.5 trillion in government funded bailout according to Zandi and Blinder report, of which all but $1.6 trillion will be recovered, they said, but I don’t know. And many of the large banks are still insolvent. Same in Europe? I’m trying to wrap my mind around the crisis still. The debts are coming due, and the public is stuck with paying for them with bailouts, rising national debt, and in terms of low employment, foreclosures, stagnant wages, and reduced government. And hysteria over government debt. The lender dictates the terms of any loan, has more knowledge of the risks, and should take the loss. There was a Plan B in 2008, government taking over the banks, it never was discussed.

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